75% of Large Cap Funds underperformed Index in 2022!!

Can you believe that in 2022, 75% of Large Cap Funds underperformed the index? Furthermore, when we compare 3 and 5-year returns, only 31% and 25% of active funds outperformed the index, respectively.

Large Cap Funds underperformed Index

Hard to believe right? But this is the reality. That’s the reason two quotes always make me follow index funds blindly.

Daniel Kahneman in his book ‘Thinking, Fast and Slow” mentioned that “Mutual funds are run by highly experienced and hardworking professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than playing poker. More importantly, the year-to-year correlation between the outcomes of mutual funds is very small, barely higher than zero. The successful funds in any given year are mostly lucky; they have a good roll of dice. There is general agreement among researchers that nearly all stock pickers, whether they know it or not-and few of them do-are playing a game of chance.”

Quote from Warren Buffett “The best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of professionals.

There may be some debates about active versus passive. However, the point we must make is that we simply do not know which fund will consistently outperform the benchmark after accounting for costs (expenses).

Few would argue that alpha for active funds is higher in mid-cap and small-cap than in large-cap. Again, there are few winners and few losers in those categories. Finding the winner for average investors (and those who advocate active funds) is the most difficult task.

When the list of underperformers is long and inconsistent, how can one believe that active funds are superior to passive funds?

75% of Large Cap Funds underperformed Index in 2022!!

The data was obtained directly from the AMFI website, and the values are as of December 14, 2022. As a result, I doubt that many people will question the data:)

Again, for the sake of simplicity, I am comparing only direct funds and not regular funds. I’ve listed all of them from the AMFI website that are classified as large-cap active funds.

You may have noticed that the list includes 29 funds. When one-year returns are considered, approximately 7 funds outperformed the index. However, Nippon India Large Cap Fund is the only fund that we can say truly outperformed (considering the cost difference between active and passive) the index. Even though the remaining six funds outperformed the index, their alpha is marginal to negative when compared to passive funds’ expenses.

When we compare three-year returns, only about nine funds outperformed the index. If we include the high fees charged by these funds, the alpha created over the index is almost nil.

Similarly, when we compare returns over five years, only seven funds outperformed the index. The maximum alpha over the index is 2.29%. The rest of the funds, even though produced some alpha, but are all less than 1%.

When we compare the consistent outperformers over one year, three years, and five years, only two funds outperformed the benchmark out of 29 funds. As a result, the ratio of consistent outperformers is a pitiful 7%!!

Do we still need ACTIVE FUNDS???? The decision is YOUR’S!!

4 Responses

  1. Dear Mr Basu

    1) Do active large cap funds offer any downside protection when compared to their benchmarks? Should this matter to an investor?

    2) If we had to choose an active MF, then is flexicap the best category?

    Thanks and regards


    1. Dear Advait,
      1) If that were the case, then the results might be fantastic rather than the pathetic stories as mentioned above. It is a MYTH.
      2) Enough.

  2. Do you still required Flexi cap funds when your core portfolio contains Nifty 50 index fund. Because most of the flexi cap funds are active,hence questions arise do we need flexi cap fund

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